Dutch Economic Woes Will Negatively Impact Banks, Moody’s Says

Dutch banks face a difficult operating environment next year as the economic downturn weighs on margins, Moody’s Investors Service said, retaining its negative outlook on the industry.

“Deteriorating macro-economic conditions combined with key economic structural weaknesses will negatively impact the banks’ financial condition through increased loan losses and higher funding costs,” Moody’s analysts including Nick Hill and Yasuko Nakamura said in a report today.

ABN Amro NV, the lender nationalized after Fortis Bank collapsed in 2008, said last month that the profit outlook was “unfavorable” citing higher bad loan provisions. The Dutch economy, the euro area's fifth-largest, contracted 1.1 percent in the third quarter and its consumer-confidence indicator slid to minus 41 last month, the lowest on record.

Moody's said net interest margins, a measure of interest returns relative to expenses, will narrow, while competition in the domestic consumer banking business intensifies, limiting the capacity of lenders to strengthen capital buffers.

The negative outlook on Dutch banks is in line with the nation’s sovereign rating, Moody’s said. The ratings company referred to a report by the Dutch central bank, which said economic growth from 2008 to 2014 would be the weakest since the World War II.

There is a high probability that the Netherlands will support ABN Amro Bank NV, ING Bank NV, Rabobank and SNS Bank NV, which Moody’s defined as the most systematically important lenders, because the government has sufficient financial flexibility, according to the report.

The structural weaknesses of banks in the country include household debt, high balance-sheet leverage and “considerable reliance” on market funding, Moody’s said.

Commercial real estate and, to a lesser extent, residential mortgages will have the biggest impact on higher loan losses, the ratings company said.

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